2016 Estate Planning and Community Property Law Journal CLE & Expo March 4, 2016 Lubbock, Texas

Transcription

1 2016 Estate Planning and Community Property Law Journal CLE & Expo March 4, 2016 Lubbock, Texas Darren B. Moore Bourland, Wall & Wenzel, P.C. Attorneys and Counselors 301 Commerce Street, Suite 1500 Fort Worth, Texas (817) (Telephone)

2 Nonprofit Organizations Tax-Exempt Organizations Charitable Organizations Public Charities Private Foundations

3 Per 509(a): Organization described in 501(c)(3) other than the following: Traditional public charities Publicly supported charities Supporting organizations Public safety testing organizations (i.e. 501(c)(3) is a private foundation if it fails to qualify as a public charity)

4 Most common Generally receives its funding from one primary source, such as an individual, a family or a corporation Does not generally actively raise funds or seek grants Required to distribute approximately 5% of its assets annually to public charities Donors charitable income tax deductions are more limited than when made to a public charity.

5 Gifts of Cash and Nonappreciated Property Limited to 30% of AGI 50% if to public charity or private operating foundation Gifts of Appreciated Property Limited to 20% of AGI If gift of qualified stock, donor can write off fair market value If not qualified stock, donor must write off basis 30% if to public charity or private operating foundation

6 Audit Tax originally intended to fund exams of PF s (within 4940s but not as prohibited transaction tax that can be avoided) Tax-exempt foundations Tax is 2% of Net Investment Income Rate reduced to 1% in certain circumstances

7 Self dealing certain actions between a private foundation and a disqualified person can be direct or indirect, and includes: Sale or exchange or leasing of property Lending of money or extension of credit Furnishing of goods/services/facilities (limited exception) Payment of compensation (limited exception) See 4941 for comprehensive list

8 1. Foundation Managers (officers, directors, trustees) 2. Substantial contributors (greater than 2% of total contributions since inception and more than $5000) 3. 20% Owners (owner of 20%+ control of organization that is a substantial contributor) 4. Family Member of (1), (2) or (3) (spouses, ancestors, children, grandchildren, great grandchildren) 5. 35% owned entities (organizations more than 35% controlled by any of the above)

9 Private Foundation must generally distribute at least 5% of its Asset Base on an annual basis in qualifying distributions Asset Base includes those assets not used in furtherance of the foundation s exempt purposes, such as the foundation s office building Generally includes cash, stocks, bonds and other investment assets Qualifying Distributions Grants to qualified charitable organizations (other 501(c)(3) organizations) Grants to non-charities for charitable purposes (requires expenditure responsibility) Special rules for grants to individuals for travel, study, or similar Costs of direct charitable activities

10 Foundations are limited in business ownership, and may only own 20% of voting stock in a corporation, reduced by the percentage owned by all Disqualified Persons 35% of voting interest (reduced by what Disqualified Person owns) if control is not in Disqualified Person De minimis 2% voting stock or value 5 years to dispose of Excess Business Holdings May not dispose of interest to a Disqualified Person

11 Private Foundation cannot make investments which would jeopardize the exempt purpose No per se violations in code Prudent Investor standard of care Examples: Margins, selling short Speculative investments Does not apply to gifts received by the Private Foundation

12 Expenditures not in furtherance of exempt purpose Carrying on propaganda or political activities Distributions to non-public charities Unless distribution is in fact charitable and expenditure responsibility is exercised Grants to individuals Unless IRS approval in advance or disaster relief, etc.

13 Directly carry on charitable activities, instead of making grants to other organizations Donors receive more liberal public charity deductibility limits Must meet the income test AND one of three OTHER tests assets test endowment test support test - Computation Period: Based upon year in question and the three preceding years

14 Must distribute Substantially All of the lesser of its Adjusted Net Income or its Minimum Investment Return directly for the active conduct of its exempt purpose Does not include grants to other organizations Substantially All means 85% or more Adjusted Net Income gross income less deductions allowable to a corporation Does not include gifts, grants or contributions Minimum Investment Return 5% of the assets not used directly in carrying out exempt purposes (same test as Minimum Distribution for a Private Foundation)

15 Assets Test Substantially more than ½ of assets must be held for use for exempt function activities Defined to be 65% or more Endowment Test Direct distributions of at least 2/3 of the Foundation s Minimum Investment Return, or 3-1/3% of its endowment

16 At least 85% of the organization s Support (excluding gross investment income) must be from a combination of the general public and 5 or more exempt organizations and Not more than 25% of Support (excluding gross investment income) must be from any one exempt organization and Not more than 50% of Support be from gross investment income Based upon year in question and three prior years (met on aggregate basis)

17 Not subject to the tax on undistributed income Subject to prohibition/excise tax relating to: Self-Dealing Excess Business Holdings Jeopardizing Investments Taxable Expenditures

18 Institutional public charities Section 509(a)(1);170(b)(1)(A)(i)-(v) By definition or activity (churches, schools, hospitals) Publicly supported charities 509(a)(1);170(b)(1)(A)(vi) donative public charities (e.g. United Way) 509(a)(2) gross receipts or service provider public charities (e.g. museum, zoo, opera) Supporting Organizations 509(a)(3) Public Safety Organizations

19 IRC 170(b)(1)(A) includes Churches and conventions of churches Educational organizations Hospitals/medical research facilities Endowment funds for state and municipal universities Governmental Units Specific and detailed regulations govern each type of IRC 509(a)(1) institutional public charity No additional requirements to be classified as public charities

20 Referenced in 509(a)(1) and 170(b)(1)(A)(vi) Does not provide services Must receive a substantial part of its support from the public or governmental units; two either/or tests Mechanical Test: Must normally receive at least 1/3 of total support from governmental units or the general public Facts and Circumstances Test Example: Humane Society, Union Gospel Mission, United Way

21 Computation: Public Support/Total Support Total Support: Gifts, grants, and contributions Certain membership fees Net unrelated business income Gross investment income (excluding capital gains) Excludes exempt function revenue Public support is total support minus: Net unrelated business income Gross investment income (excluding capital gains) Contributions in excess of 2% of total support from one source Excludes unusual grants from both public support and total support

22 Described in 509(a)(2) Generally has members Provides services or has gross receipts Must meet 2 public support tests (different tests from donative public charities) Example: Museum of Science & History, Fort Worth Zoo

23 Gross receipts or service provider public charity must meet the: Not more than 1/3 support test not more than 1/3 of its total support from gross investment income and net unrelated business income More than 1/3 support test more than 1/3 of its total support from governmental units or general public support

24 Must normally receive more than 1/3 of its support from the public Numerator (Public Support) Amounts from governmental units Amounts from other than disqualified persons Amounts received from other public charities Gross receipts: Counted as Public Support only to the extent the amount received from each individual does not exceed $5,000 or 1% of the Total Support for the year Gross receipts is exempt function revenue -- public support does not include UBTI

25 Denominator (Total Support) Includes everything BUT: Unusual grants Voluntary services Capital gains In other words, these items are excluded from the support fraction entirely Receipts from Disqualified Persons Not counted at all as Public Support, but included in Total Support DPs include Substantial Contributors Any person who has contributed more than $5,000 if this amount is more than 2% of all gifts received by the organization since its creation (and family members, etc. of the substantial contributor)

26 Described in 509(a)(3) Organized and operated at all times for the benefit of, and to perform the functions of, a specified IRC 509(a)(1) or (a)(2) charity; Operated, supervised, or controlled by, or in connection with one or more IRC 509(a)(1) or (a)(2) charity; and Cannot be controlled directly or indirectly by one or more disqualified persons other than foundation managers and other than one or more public charities).

27 Organizational Documents Must State that purposes of the organization are limited to the purposes or one or more benefited public charities Not expressly empower the SO to engage in activities that do not further the charitable purposes of the benefited charity Designate by class or purpose or by name the public charities to be benefited On 990 SO must list all supported organizations, an indication of the Type of SO it is, and a statement that the SO is not controlled by donors or parties related to donors Not authorize the SO to benefit any other public or private charity or charities

28 Must be operated exclusively for the support of the supported organizations Permissible beneficiary requirement Providing for the charitable class benefited by the specified public charity Permissible activity requirement Pay to the supported organization or use funds to carry on an independent activity that supports or benefits the supported organization

29 Operated, supervised or controlled by one or more publicly supported organizations Parent/Subsidiary relationship Control by publicly supported organization Majority of officers, directors, trustees appointed by supported organization Purposes similar to and no broader than that of supported organization Specified organization requirement Designate by name in governing documents Designate by class in governing documents, or Historic and Continuing Relationship

30 Supervised or controlled in connection with publicly supported charity Brother/Sister Relationship Common supervision or control Such that SO will be responsive to needs and requirements of supported organization Mere making of payments not enough of a connection

31 Operated in Connection With one or more publicly supported charities Must specify supported public charity by name Not permitted to substitute supported organizations, unless predicated on something out of organization s control May not support foreign organizations Notification Test Responsiveness Test Integral Part Test Functionally-related Type III supporting organization Non functionally-related Type III supporting organization

32 Must have: 1. Appointee requirement 2. OR common director requirement 3. OR close and continuous requirement 4. AND significant voice requirement

33 But For Test Engage in activities that directly further the exempt purposes of the supported organization; but for the activities of the SO, the supported organization would carry on the activity itself Fundraising/investing, etc. insufficient Supporting organization is the parent of supported organization

34 o o Distribution Requirement Greater of 85% of adjusted net income or 3.5% of FMV non-exempt use assets Attentiveness Requirement: Distribute at least 1/3 to one or more supported organizations that are attentive to the supporting organization and to which the supporting organization is responsive Attentive = receive sufficient part of total support from the supporting organization.

35 Public charities are not subject to the private foundation excise taxes under IRC Instead, subject to intermediate sanctions, the rules regarding excess benefit transactions set forth in IRC 4958 and Treas. Regs through

36 Transactions between public charity and Disqualified Person must be at fair market value Difference from DP for private foundation purposes Defined as any person who is in a position to exercise substantial influence over the affairs of the charity at any time during a 5 year period ending on date of transaction Similar family/business attribution rules to PF Any excess benefit is subject to an excise tax Presumptive safe harbor available

37 Owned and controlled by a sponsoring organization Tracked with reference to donor(s) or related persons Donor, donor appointee or related party has advisory privileges concerning distributions or investments Certain exceptions apply (distributions to single org/governmental entity; advised by majority disinterested committee chosen by sponsoring organization)

38 Special Rules: Donors, donor advisors and investment advisors of DAF are automatically DPs of sponsoring organization Section 4966 excise tax on distributions to individuals Prohibition on DAF making grants, loans, compensation or similar payments to donors, donor advisors or related persons Entire prohibited payment is excess benefit transaction Section 4967 excise tax on more than incidental benefit to donor, donor advisor or related person Sponsoring Organization DAF DAF DAF

39 The information set forth in this outline should not be considered legal advice, because every fact pattern is unique. The information set forth herein is solely for purposes of discussion and to guide practitioners in their thinking regarding the issues addressed herein. Non-lawyers are advised to consult an attorney before undertaking any issues addressed herein. Unless otherwise stated herein, pursuant to requirements prescribed by the Internal Revenue Service under Circular 230 for tax practitioners, Bourland, Wall & Wenzel P.C. must inform you that any U.S. federal tax advice or opinions contained in this paper are not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter addressed in this communication.